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Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: ICR0000724

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-43520)

ON A

LOAN

IN THE AMOUNT OF EURO 33.2 MILLION (US$36.3 MILLION EQUIVALENT)

TO THE

CROATIAN BANK FOR RECONSTRUCTION AND DEVELOPMENT

FOR A

MUNICIPAL ENVIRONMENTAL INFRASTRUCTURE PROJECT

September 23, 2008

Sustainable Development Department Central Europe and the Baltic Countries Unit Europe and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective September 11, 2008)

Currency Unit = Croatian Kuna (HRK) HRK 1.00 = US$ 0.20 US$ 1.00 = HRK 5.03

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

Bank International Bank for Reconstruction and Development (IBRD) BOD Biochemical Oxygen Demand CAS Country Assistance Strategy EBRD European Bank for Reconstruction and Development EIA Environmental Impact Assessment EKO EKO Kastelanski Zaljev (Implementing Agency) ERR Economic Rate of Return EU European Union FMS Financial Management System FRR Financial Rate of Return FMR Financial Management Report HBOR Hrvatska banka za obnovu i razvitak (Croatian Bank for Reconstruction and

Development – the Borrower HV Hrvatske vode (Croatian Waters) OFI Oceanography and Fisheries Institute (Split) IBRD International Bank for Reconstruction and Development MEIP Municipal Environmental Infrastructure Project NPV Net Present Value PHI Public Health Institute PIT Project Implementation Team PTL Program Team Leader SWSC Split Water and Sewage Company TTL Task Team Leader WWTP Waste Water Treatment Plant

REPUBLIC OF CROATIA Municipal Environmental Infrastructure Project

CONTENTS

Data Sheet

A. Basic Information........................................................................................................iB. Key Dates ....................................................................................................................iC. Ratings Summary ........................................................................................................iD. Sector and Theme Codes............................................................................................iiE. Bank Staff ...................................................................................................................iiF. Results Framework Analysis .....................................................................................iiiG. Ratings of Project Performance in ISRs.....................................................................vH. Restructuring (if any) ................................................................................................viI. Disbursement Profile .................................................................................................vi1. Project Context, Development Objectives and Design ..............................................12. Key Factors Affecting Implementation and Outcomes..............................................33. Assessment of Outcomes ...........................................................................................94. Assessment of Risk to Development Outcome.........................................................125. Assessment of Bank and Borrower Performance.....................................................136. Lessons Learned........................................................................................................157. Comments on Issues Raised by Borrower/Implementing Agencies/Partners...........16Annex 1. Project Costs and Financing ..........................................................................17Annex 2. Detailed Cost Data by Component ................................................................19Annex 3. Project Indicators...........................................................................................21Annex 4. Economic and Financial Analysis .................................................................26Annex 5. Bank Lending and Implementation Support/Supervision Processes.............28Annex 6. Summary of Borrower’s ICR and/or Comments on Draft ICR .....................30Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders .......................36Annex 8. List of Supporting Documents.......................................................................43Annex 9. Maps (28669 and 28670)...............................................................................44

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REPUBLIC OF CROATIA Municipal Environmental Infrastructure Project

A. Basic Information

Country: Croatia Project Name: Municipal Environmental Infrastructure Project

Project ID: P043444 L/C/TF Number(s): IBRD-43520

ICR Date: 09/23/2008 ICR Type: Core ICR

Lending Instrument: SIL Borrower: CROATIAN BANK FOR RECONST. & DEVELOP.

Original Total Commitment:

USD 36.3M Disbursed Amount: USD 38.4M

Environmental Category: A

Implementing Agencies: EKO Kastelanski Zaljev Split Water and Sewerage Company (SWSC)

Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 03/29/1996 Effectiveness: 06/28/1999 06/28/1999

Appraisal: 12/07/1997 Restructuring(s):

Approval: 06/18/1998 Mid-term Review: 10/01/2001 10/01/2001

Closing: 06/30/2006 12/31/2007

C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Moderately Satisfactory

Borrower Performance: Moderately Satisfactory

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C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)

Bank Ratings Borrower Ratings

Quality at Entry: Moderately Unsatisfactory

Government: Moderately Satisfactory

Quality of Supervision:Satisfactory Implementing Agency/Agencies:

Satisfactory

Overall Bank Performance:

Moderately SatisfactoryOverall Borrower Performance:

Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating

Potential Problem Project at any time (Yes/No):

No Quality at Entry (QEA):

Satisfactory

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Moderately Satisfactory

D. Sector and Theme Codes Original Actual

Sector Code (as % of total Bank financing)

Sewerage 70 70

Water supply 30 30

Theme Code (Primary/Secondary)

Pollution management and environmental health Primary Primary

Rural services and infrastructure Primary Primary

Water resource management Primary Primary

E. Bank Staff Positions At ICR At Approval

Vice President: Shigeo Katsu Johannes F. Linn

Country Director: Orsalia Kalantzopoulos Arntraud Hartmann

Sector Manager: Wael Zakout Walter A. Stottmann

Project Team Leader: Stjepan Gabric Richard A. MacEwen

ICR Team Leader: Stjepan Gabric

ICR Primary Author: Maha J. Armaly

Vladimir Skendrovic

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F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document)Reduce municipal wastewater pollutant discharges into the environmentally sensitive Kastela and Trogir Bays consistent with applicable Croatian and EU standards. Improve the safety, reliability and delivery of drinking water in the project area. Improve the operational and financial performance of the SWSC. Revised Project Development Objectives (as approved by original approving authority)

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : SWSC unaccounted for water

Value quantitative or Qualitative)

22% 53.6%

Date achieved 12/31/2007 12/31/2007 Comments (incl. % achievement)

Confirmed baseline value for 1998: 38.3%

Indicator 2 : Visible oil and grease slicks Value quantitative or Qualitative)

Visible No visible No visible

Date achieved 12/31/1998 12/31/2007 12/31/2007 Comments (incl. % achievement)

Indicator 3 : Kilograms of BOD discharged to Kastela and Trogir Bays Value quantitative or Qualitative)

30,000 1,000 900


Confirmed baseline data for 1998: 1800 t/year Confirmed baseline data for 2002: 3100 t/year

Indicator 4 : Average E coli levels (E. coli/100 ml) at 15 monitoring sites in Kastela and Trogir Bays


50 E-coli/100ml 0 E-coli/100ml

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approval documents)

Formally Revised Target Values



Date achieved 12/07/1997 12/31/2005 Comments (incl. % achievement)

2006 results were below maximum allowed concentration for 94% of samples investigated (according to Croatian water quality standards)

Indicator 5 : Percentage of SWSC customers receiving 24 hours water supply (no customer with less than 4 hours daily supply)


70% 90% 100%


Indicator 6 : Ratio of SWSC revenue collected to revenue invoiced Value quantitative or Qualitative)

80% 95% 75%


Confirmed baseline value for 1998: 60%

Indicator 7 : SWSC operating ratio Value quantitative or Qualitative)

1.00 0.75 1.04


Confirmed baseline value for 1998: 1.23

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(b) Intermediate Outcome Indicator(s)



approval documents)

Formally Revised

Target Values



Indicator 1 : Completion of construction contracts and disbursement of funds Value (quantitative or Qualitative)

0 100% 100%


G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/29/1998 Highly Satisfactory Highly Satisfactory 0.00 2 12/29/1998 Highly Satisfactory Highly Satisfactory 0.00 3 06/25/1999 Satisfactory Satisfactory 0.00 4 12/07/1999 Satisfactory Satisfactory 1.06 5 03/07/2000 Satisfactory Satisfactory 1.52 6 12/06/2000 Unsatisfactory Unsatisfactory 3.97 7 02/06/2001 Unsatisfactory Unsatisfactory 4.48 8 06/27/2001 Unsatisfactory Satisfactory 6.32 9 08/30/2001 Satisfactory Satisfactory 6.72 10 11/07/2001 Satisfactory Satisfactory 7.13 11 04/19/2002 Satisfactory Satisfactory 8.23 12 11/12/2002 Satisfactory Satisfactory 10.02 13 06/23/2003 Satisfactory Satisfactory 11.64 14 12/22/2003 Satisfactory Satisfactory 14.48 15 01/29/2004 Satisfactory Satisfactory 14.48 16 06/25/2004 Satisfactory Satisfactory 16.27 17 12/09/2004 Satisfactory Unsatisfactory 17.72 18 05/22/2005 Satisfactory Satisfactory 18.46 19 10/16/2005 Satisfactory Satisfactory 20.15 20 11/01/2005 Satisfactory Satisfactory 20.15 21 03/09/2006 Satisfactory Satisfactory 21.47 22 01/14/2007 Moderately Satisfactory Moderately Satisfactory 25.07 23 06/26/2007 Moderately Satisfactory Moderately Satisfactory 34.42 24 11/13/2007 Moderately Satisfactory Satisfactory 38.40

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H. Restructuring (if any) Not Applicable

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal The project was designed in line with the priorities outlined in the Country Assistance Strategy (CAS) at the time of appraisal. The CAS emphasized the importance of the environment and the link to the tourism sector. The CAS also called for rehabilitation of infrastructure to redress war damage or years of deferred investments. The Government emphasized support to areas that have a strong potential for fostering economic recovery stressing reconstruction and infrastructure modernization. The Kastela Bay area was proclaimed an environmental hot spot by the Croatian Parliament as early as 1994, and the Government declared waste water management in the Split – Dalmatia County a state priority to promote environmental protection and tourism development. The region was characterized by a large influx of migrants including refugees, intense construction for housing and industrial purposes, which was not followed by the needed infrastructure development. Difficulties were faced in maintaining and upgrading infrastructure due to financial constraints and the effect of the war. Issues that were important to the sector identified at the time included: (a) cost recovery; (b) efficiency of local water and sanitation utilities, (c) gap in wastewater coverage and treatment; and (d) protection of marine environment. The project addressed the priorities outlined in the CAS and government strategy. 1.2 Original Project Development Objectives (PDO) and Key Indicators Development Objectives: The development objectives of the proposed project are to:

(i) reduce municipal wastewater pollutant discharges into the environmentally sensitive Kastela and Trogir Bays consistent with Croatian and EU standards;

(ii) improve the safety, reliability, and delivery of drinking water in the project area; and (iii) improve the operational and financial performance of the water and wastewater utility, to

make it more attractive for private sector participation in the future. Key Indicators: The project included eight types of performance measurements to be reached by the end of the Project, as follows:

(a) Completion of construction contracts and disbursement of funds; (b) Reduction of oil and grease pollution to no visible slicks; (c) Reduction in kg of biochemical oxygen demand (BOD) discharged to Kastela and Trogir

Bays; (d) Reduction in average E-coli levels at 15 monitoring sites in Kastela and Trogir Bays; (e) Twenty four hours supply of water for 90% of the Split Water and Sanitation Company

(SWSC) customers with less than 4 hours supply; (f) Increase in ratio of SWSC revenue collected to revenue invoiced from 80% to 95%; (g) Improvement in SWSC operating ratio from 1.00 to 0.75; and (h) Unaccounted-for water (UFW) not to exceed 22%.

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1.3 Revised PDO (as approved by original approving authority) The project development objectives were not revised.

1.4 Main Beneficiaries The population of about 350,000 in the project area (the cities of Split, Solin, Kastela and Trogir and their surrounding areas) were identified and remain the principal beneficiaries of the project through the direct benefits of safer and more reliable water supply and sanitation, and the indirect benefits of increased tourism in the area, which would stimulate local private enterprise catering to the tourist industry.

1.5 Original Components (as approved)

Component A - Wastewater A1 Split-Solin System (IBRD financing): consisting of: 6 new pumping stations, 4 rising mains, six gravity sewers, a new mechanical treatment WWTP, about 2400 m long tunnel to transport wastewater to the new WWTP, and a submarine outfall

A2 Kastela-Trogir System (EBRD financing) consisting of: 3 pumping stations, 5 rising mains, ten gravity sewers, approximately 1800 m long tunnel and pipeline, new mechanical treatment WWTP, and a new submarine outfall.

Component B - Water Supply B1 Water supply system Split-Solin-Kaštela-Trogir (IBRD financing): consisting of the reconstruction and upgrading of selected parts of the Split-Solin-Kastela-Trogir water supply system including (i) pumping station at Solin with underground structures; two pumps (and a third standby), inlet pipelines, electrical installations, and telemetric equipment; (ii) Sv. Kajo sub-system consisting of underground structures; a pumping station with two pumps, a reservoir, and feed and supply pipes; (iii) Kastela Sucurac sub-system consisting of facilities to complement the pumping station that was under construction at the time of appraisal, including: a reservoir and feed and supply pipes, and Kastela mains.

B2 Water supply systems Ravne Njive and Kunceva Greda (EBRD financing) including: (i) Ravne Njive sub-system consisting of a new pumping station with a distribution chamber, an engine room, six new pumps, and a diesel generator set; (ii) Kunceva Greda sub-system consisting of a new pumping station with three pumps, two reservoirs, pipelines, and a diesel generator set. Component C - Institutional Strengthening The institutional strengthening component includes: (i) technical assistance to SWSC to improve management, operational and financial performance, including preparation of a Performance Enhancement Program and a Corporate Development Plan. (IBBRD/Denmark financing); (ii) technical assistance to EKO to enhance capability for implementation of major water and wastewater investment projects, including procurement and project financial management. (Denmark); (iii) laboratory measuring and testing equipment for HV for the environmental monitoring of wastewater discharges into the Kastela and Trogir Bays, and the Split and Brac Channels. (EBRD financing); (iv) operational and maintenance equipment for SWSC. (IBRD financing); (v) accounting and auditing services to EKO and SWSC for audits of the project accounts and entity financial statements.

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1.6 Revised Components The components of the project were not revised.

1.7 Other significant changes The Project components remained the same, but the scope and financing of the project changed. An amendment to the loan agreement in December 2001 allowed the IBRD to finance Component A2 –Kastela – Trogir Wastewater, which was originally to be financed by a loan from the European Bank for Reconstruction and Development (EBRD). IBRD financing thus focused on sanitation, while the EBRD focused on the water supply component. The Government, realizing the improved economic potential of the project area, committed significant new resources (about 70 million Euros) to the project to improve the efficiency of investments, optimize the service levels, and increase coverage. The changes are discussed below and summarized in Annex 1, Table 2 and 3 (Project Cost and Financing Plan), and Annex 3, Table 5 (Output Indicators).

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry The project was originally identified in 1988, but was halted during 1992-1995 due to the war. It was officially re-identified in October 1995 and appraised about 2 years after. Negotiations and effectiveness followed soon thereafter, and implementation started in August 1998. The original closing date of June 30, 2006, was extended to December 2007. The project was designed to be co-financed with the EBRD with each institution financing separate components. The agreement of the four participating municipalities on project implementation arrangement was essential for project start up. They agreed to have the special agency (EKO) established to implement the project. EKO was designed to bring together the best available local technical expertise to focus on project supervision and management, yet remain independent from the utility and the municipality. EKO acted as the PIU and reported to the board of the SWSC, and handled all the daily project implementation issues such as procurement and disbursement. The borrower of the Bank funds was Hrvatska banka za obnovu i razvitak (Croatian Bank for Reconstruction and Development) known as HBOR, which retained a supervisory role of project progress. A Subsidiary Agreement between HBOR, EKO and SWSC, and a Guarantee and Project Support Agreement between HBOR and the four participating municipalities defined their mutual obligations for the duration of the project. They included monitorable targets for institutional performance, bill collection performance, and operational efficiency improvements. These performance targets would be used to track and evaluate progress made towards these objectives. Experience in past Bank-financed water and wastewater projects in the former Yugoslavia (including components that were implemented within the territory of Croatia) was assessed during project preparation. Most projects achieved their physical objectives, but frequently fell short of meeting their institutional, financial and technical efficiency development objectives. The project included as an objective the improvements of the operational and financial performance of the SWSC and technical assistance to support the objective. The financial statements of SWSC were analyzed and projected for the period of implementation. Baseline indicators and associated targets were also identified. A positive feature of design at entry was that tariffs were raised in March 1998 by 30% in order to ensure SWSC’s financial participation in the project. Other increases were envisaged and built into the financial projections: in real terms, 15% in 2003 and 1.5 and 2% respectively in 2002 and 2003. Along with some

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efficiency improvements, working and operating ratios were to reach 0.61 and 0.75 respectively by the end of the project from about 1.02 and 1.08 in 1997.

At the time of preparation, risk assessment was not streamlined explicitly into the appraisal process. However, risks were identified either explicitly or implicitly and addressed. The sector risks were recognized from studies and previous Bank experience, and revolved around cost recovery, deterioration of service, and increased pollution. The project addresses the sector risks in the project area. Risks to implementation included lack of experience in SWSC in implementing Bank projects and the difficulties involved in coordinating actions among several municipalities. For this purpose, the EKO unit was conceived as an independent entity where skills in project management were focused to implement the project and coordinate with the Bank. Sustainability was positively assessed given the support of the principal stakeholders. The Quality Assurance Group (QAG) undertook an assessment of the project quality at entry in February 1999 and gave a satisfactory score in 7 out of the nine criteria assessed. Social analysis and involuntary resettlement/land acquisition scored low as did the financial analysis and agreements on monitoring and evaluation. The quality at entry of the project, based on the above, is mixed. The implementation arrangements and government commitment were in place and facilitated physical implementation. The variety of donors, types and scopes of investments justified a dedicated implementing agency to focus skills and attention on project implementation. Risks of delays in implementation due to permits, land acquisition, and/or redesign were not foreseen. Financial analysis was optimistic and did not include sensitivity analysis. Nevertheless appropriate technical assistance was included for the third component to improve operational efficiency of SWSC..

2.2 Implementation Physical Components: The fully completed Split-Solin Wastewater component was completed in a timely manner and before the original closing date of the project. The component actual costs (without the additional government financed facilities not envisaged at appraisal) were about 16% above appraisal costs. The plant is now operational and is constantly maintained by SWSC, whose staff was trained during implementation. The Water Component which was financed by the EBRD is also at the operational stage, and SWSC is operating both components satisfactorily. Actual costs were at about 95% of appraisal estimate for the water component. The main delays in implementation occurred in Component A2: Kastela-Trogir WasteWater component which the Bank assumed from the EBRD in December 2001. The main reasons for the delays were problems with the planned land acquisition and rights of way. The inhabitants of the Okrug settlement protested against the construction of the WWTP and submarine outfall in their neighborhood. A new design and layout had to be prepared and a new process of obtaining the relevant permits for the new design and new locations of the WWTP and tunnels initiated. The process included revising the original environmental impact assessment study, obtaining new location and construction permits, and implementing changes in the zoning and spatial development plans, which had to be adopted by the cities of Kastela and Trogir. The process took about 3.5 years to complete, before the bidding procedure and actual construction could start. The construction is now ongoing and all planned structures will be completed and operational during the first half of 2009. The actual cost of this component was about 72% above the original estimate. For the total project costs, actual costs were 26% above appraisal estimates without the additional facilities financed by the Government. This is not unreasonable given the longer than estimated implementation period, and the change in the economic situation in Croatia, particularly in relation to the boom and associated increased costs in the construction industry.

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In addition, the Government’s decision to expand the scope of the project required additional time to complete. The scope of the planned works changed in terms of length of mains, number and capacity of pumping stations, and locations of tunnels and the Kastela-Trogir WWTP. Additional facilities and subsystems were included to connect new clients, and to ensure better functioning and efficiency of the newly constructed systems. To this end, the areas of Dugopolje (to the north of Split) and the south belt in Vranjic were included in the project, and the sewer network was expanded in the area of the cities of Kastela and Trogir. The investment program was adjusted to meet the changing and expanding needs of the area residents. All additional facilities and subsystems were financed from local sources. Additional government contribution to that effect amounted to 70 million Euros, with more than 60 million Euros to the two sanitation components. To accommodate these changes, the Borrower requested, and the Bank agreed to extend the closing date of the loan to December 31, 2007. The IBRD loan is now fully utilized, and the remaining work, financed by the Government, is expected to be completed by December 2008/early 2009. Project Implementation Arrangements. HBOR focused on the institutional and financial aspects of SWSCs and encouraged the utility to take corrective actions, including undertaking the Financial and Corporate Restructuring Plan. EKO cooperated closely with SWSC to implement the project focused on daily project implementation, and built skills in procurement, disbursement and financial management of the project accounts. This generally worked well for the project. EKO continues to exist to complete project implementation of the remaining Government-financed components. Operational and Institutional Issues: The project aimed to address the lingering issue of financial sustainability and cost recovery in the water and sanitation sector in Croatia, and at the SWSC in particular. SWSC was to implement a Performance Enhancement Plan and a Corporate Development and Action Plan to improve its operations and maintenance. During implementation, the operational and financial improvements of the SWSC was a main concern for both the Bank and HBOR for the following reasons: (i) UFW continued to deteriorate; (ii) investments were expanding, and depreciation costs were increasing considerably raising questions as to SWSC’s ability to afford maintenance costs; and (iii) tariffs were not increased since 2004. SWSC took several actions to improve its operational efficiency. It financed the purchase of vehicle for leak detection, replaced pipes, initiated public information campaign, and solicited community participation to report on illegal connection (but got little response). SWSC also initiated a Performance Improvement Plan that focused on UFW reduction. These actions did not deliver the desired results. Tariffs were increased in 2004 by almost two thirds for the household and non-household customers. Planned tariff increases for 2008 have not yet materialized. Municipalities were reluctant to increase tariffs every year. Instead, and as has been traditional in Croatia, municipalities continue to support their utilities with capital and operational subsidies. A mid-term review took place in December 2003 and took stock of project progress, updated the procurement plan, reviewed financial management arrangements, and requested a social assessment for the Kastela-Trogir system after citizen protests. The mid-term also looked into the details of SWSC finances. While the mission was generally satisfied with SWSC financial performance, it highlighted the need for improvements given the increased depreciation costs and the need for higher operations and management capacities of the new investments.

2.3 Monitoring and Evaluation (M&E) Design and Implementation Monitoring and evaluation arrangements were designed to measure the outcome of each of the components. They were further defined in the Subsidiary Agreement between HBOR and EKO/SWSC, and in the Guarantee and Project Support Agreement between HBOR and the four participating

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municipalities. Reporting was planned on a semi-annual basis with a mid term review in 2000 (later revised to 2003). The details of available data and source institutions were not clear at appraisal, and were clarified during implementation when deficiencies were detected in (i) baseline figures; (ii) adequacy and availability of the indicators; and (iii) identification of responsible agencies. In early 2007, the Bank team agreed with the environmental monitoring institutions and project stakeholders on adequate and more readily available and routinely measured indicators. With these clarifications, EKO took the lead in coordinating the information from the responsible Croatian institutes: HV, the Oceanographic and Fisheries Institute (OFI) as well as consulting with the Institute of Public Health (IPH). From the Bank’s side, monitoring and reporting on the project’s indicators intensified with more responsibilities at the resident mission. Detailed discussion of the monitoring and evaluation of project objectives and the reasons for their revision discussed under the “Achievement of Project Objectives” section 3.2 and summarized below:

Table 1: Original and Revised Indicators Original

Objective/Indicator Original Indicator Revised Indicator Observed

Objective: Reduce wastewater Pollutants Discharged into the Kastela and Trogir Bays a. Reduction of oil and grease pollution to no visible slick

No visible slicks No visible slick No visible slicks

b. Reductions in BOD discharge

From 30,000 to 1000 Kilograms in Kastela and Trogir Bays

From 1794 tons in 1998. Target not changed.

2002: peaked at 3078 tons. 2004: Before commissioning of Split Solin WWTP: 3025 tons 2005: after commissioning of WWTP: 1143 tons. 2006: 889 tons.

c. Reductions in average E coli levels at 15 monitoring sites

From 50 E coli/100 ml to 0 E coli/100 ml at 15 monitoring sites in Kastela and Trogir Bays

Public Health Institute (PHI) Bactereological monitoring requirements: 80% of samples with not more than 500 for total, 100 for fecal, and 100 for streptococcus.

Compliance in 94% of the samples tested.

Objective: Improve the safety, reliability and delivery of drinking water in the project area 24 hour supply to 90% of the population

24 hour supply to 90% of the population

Safety and Reliability of Service

No Customer with less than 4 hours supply


100% of SWSC customers now receive 24 hour water supply

Objective: Improve the operational and financial performance of the SWSC a. Increase Revenue Collected to Revenue

From 80-95% From 60% baseline in 1998. Target not

75% in 2006 85% in 2007

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Original Objective/Indicator

Original Indicator Revised Indicator Observed

Invoiced changed b. Improve SWSC Operating Ratio

From 1.0 to 0.75 From 1.23 baseline in 1998. Target not changed

1.00 in 2006 1.04 in 2007

c. Unaccounted for water (UFW)

Not to exceed 22% From 38.3% baseline in 1998. Target not changed.

53.6% in 2007

Monitoring of the project’s physical implementation was detailed, and updates of work schedules, implementation and procurement plans were routinely reported. The Bank’s monitoring of the physical progress was also detailed and well documented. EKO/SWSC had the necessary technical staff to supervise the works, had good oversight of the progress of work and liaised closely with the contractors and the Bank. It took the lead to solve issues of land acquisition and rights of way. The indicators related to the progress of work (completion of construction contracts) are on track, except for the additions that were undertaken by the Government. The institutes responsible for data gathering and evaluation of the environmental data (HV, IPH, OFI) are part of the Croatian governmental framework for environmental monitoring. These are strong institutions with mandate to monitor and ensure the quality of Croatian waters in accordance with national standards and in preparation for EU accession. The government, with Bank support in other projects, continues to improve the functioning and coordination among these institutions and their role in improving the environmental monitoring of the Adriatic waters – thus strengthening sustainability of the environmental monitoring effort. The sustainability of monitoring and evaluating the operational and financial indicators of SWSC is less clear, and lies mainly with the participating municipalities and to a lesser extent with HBOR. The issues have been raised and actions introduced to continue to improve the situation, but a more sustained coordinated effort is needed.

2.4 Safeguard and Fiduciary Compliance Environment: The project was classified as category A. An environmental assessment was prepared for the Split-Solin component, public hearings were held as required under Croatian regulations and in accordance with Bank procedures. The EIA for the wastewater collection system for Kastela-Trogir was prepared in 1999 but had to be revised and approved in 2002 due to the required change of location of the WWTP (see land acquisition below). Transitional issues were addressed by suitable mitigating measures as elaborated in the Environmental Mitigation Plans EMP). The EMPs identified potential impacts and mitigation measures separately for collection systems, WWTPs and submarine outfalls. The EMPs were updated and confirmed, taking into account the findings of the detailed engineering work. Land Acquisition: The Split Solin wastewater component proceeded satisfactorily without major land acquisition and rights of way difficulties. The Kastela-Trogir wastewater component encountered delays when the residents of the Okrug settlement protested against the construction of the wastewater treatment plan and submarine outfall in their neighborhood. A new design and layout had to be prepared and new permits obtained. The process included revising the original environmental impact assessment study, issuance of new location and construction permits, and changes in the zoning and spatial development plans, which had to be adopted by the cities of Kastela and Trogir. Unresolved and unclear ownership status of some parcels caused implementation delays. The land acquisition process included about 3000 cases of land expropriation or right-of-way contracts. Cultural Heritage/chance finds led to the redesign

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of sub-projects to avoid land acquisitions or building in culturally sensitive areas. While these were difficult issues, they were dealt with appropriately and in accordance with Croatian legislation. Consultations: Broad public consultations started in the late 1980s when the project concept was set out. The final project configuration was discussed in meetings in October 1996 with representatives of NGOs, interested citizens’ groups, academic and professional associations. The meetings showed wide support for the project. EKO continued to conduct consultations with the public throughout project implementation. To date, EKO organized more than 70 press conferences to ensure that the local population is properly informed about the project progress. The experience provided valuable lessons both for the Bank and the Croatian government on the need to resolve safeguard issues as early as possible, and to inform the public and gain its confidence at an early stage. National regulations now require the resolution of land and environmental issues prior to obtaining permits and starting construction. Regulations advise investors to minimize land acquisition, to plan construction in the off tourism season, and to provide for public consultation in the process. Financial management: Financial management arrangements for the Project accounts at HBOR and EKO were satisfactory. Financial Monitoring Reports (FMRs) were prepared using appropriate accounting software, quarterly FMRs were submitted in a timely manner, and internal controls in place were found to be adequate. All audits were performed by independent auditors acceptable to the Bank. Annual audits of project accounts received unqualified opinion. The audits of the financial statements of EKO and HBOR were unqualified or with minor qualifications that were addressed. The 2007 audit for both were not qualified. The project FM arrangements, audit reports and Bank supervision missions indicated no misuse of project funds. The annual audits of SWSC were undertaken by independent auditors. For 2004-2006, audit opinions for SWSC were qualified-adverse mainly due to changes in accounting procedures the effect of which were not evaluated, non-presence of auditor during inventorying, and charging as income financial gains due to interest earned or currency exchange gains on project accounts. The 2007 SWSC annual audit, submitted in August 2008, improved to qualified-exception. Procurement: Procurement proceeded satisfactorily. Reporting on progress and updating the procurement plan were done consistently and to high standards. Some delays occurred due to problems such as lack of staffing and appropriate skills at different stages of the project, large workload, and repetition of some bidding due to high prices received, but no major deviations or problems were reported. The EKO Agency received training and assistance from the Bank procurement specialists.

2.5 Post-completion Operation/Next Phase The new facilities and networks built under the project were transferred to the ownership of SWSC. SWSC operates and maintains the completed systems in the Split-Solin wastewater and water components, using its own capacities, and the same is expected after the completion and commissioning of the Kastela-Trogir component. The utility received training for the operations and maintenance of the new WWTPs and other facilities and is already undertaking this function. Financial reviews of the utility raised concerns about the financial capacity of the SWSC to operate and maintain the system. The cities and municipalities around the Kastela Bay (as owners of the SWSC) support SWSC’s functions to provide drinking water and adequate sanitation services to their citizens. This is done through annual review of SWSC’s financial operations and consistent financial support from the municipalities to the utility. At the time of project closing, SWSC is in the process of raising water tariffs to ensure availability of funds for the proper operations and maintenance of the systems under the SWSC’s control. The SWSC has prepared and is now implementing a Performance Improvement Plan, as well as an Action

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Plan for Reduction of Water Losses, both adopted by the SWSC management in December 2007. The company’s Performance Improvement Plan anticipates increased operation and maintenance costs and envisages tariff increase to cover the increased costs. The Plan will be monitored by HBOR. The national and local governments are continuing to support the project to complete the expanded program, and to be supervised by HBOR with EKO support. The expansion is financed by local sources, including the customers’ contributions through investment surcharge.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation The project objective remains relevant more than 10 years after the project’s conception. The project is an important part of the Government’s strategy to sustain and improve the environment around the Adriatic coast, while improving the services to citizens and the economic potential in the region. The project area recovered its position as a prime tourism destination and is attracting high end tourism by emphasizing clean waters and beaches and high quality sanitary conditions. In addition, the project is now relevant to a higher level objective in Croatia, and that is meeting EU accession requirements. The project was consistent with the Country Assistance Strategy for the period FY 1995-1998 (CAS), and its objectives have remained relevant to the ongoing Country Partnership Strategy with its emphasis on environmental protection and EU accession.

3.2 Achievement of Project Development Objectives The achievement of the development objectives at the end of the implementation period is rated moderately satisfactory based on the satisfactory achievement of the first two development objectives while acknowledging the delays in the implementation of the Kastela-Trogir component, and the moderately unsatisfactory outcome of the third component. The achievement of project development objectives are measured against the agreed indicators as outlined below. Achievement of objective (i) to reduce municipal wastewater pollutant discharges into the environmentally sensitive Kastela and Trogir Bays consistent with Croatian and EU standards is rated satisfactory.

The project met this objective, when measured by the revised and corrected indicators, through the completion of the Split-Solin component and the soon to be completed Kastela-Trogir WWTP. The Bank team entered into focused discussions to revise the environmental indicators with Croatian institutes to correctly reflect the impact of the project as measured by responsible agencies in Croatia (HV, IPH, and OFI). Occurrences of phytoplankton blooms, fish kills or similar events are no longer observed. Studies carried out by OFI conclude that the level of treatment provided by the newly constructed system is sufficient for the attainment of the applicable Croatian and EU environmental and quality standards. Because the Trogir-Kastela wastewater treatment plant is not yet completed, its impact cannot be assessed satisfactory at this stage. However, advanced construction, continued supervision and government support will contribute to meeting this indicator. The quality of the sea water was measured in terms of three indicators: (a) reduction of oil and grease; (b) reduction in Biological Oxygen Demand (BOD); and (c) reduction in E coli.

(a) Reduction of oil and grease. The sea water monitoring conducted by the Institute of Oceanography and Fisheries indicate that there are no visible oil and grease slicks on the sea water surface.

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(b) Reduction of BOD load. (Reduction in Kilograms of BOD discharge to the Kastela and Trogir Bays from 30,000 to 1,000): Table 7 in Annex 3 presents municipal and industrial BOD load from 1998 to 2006 for Kastela Bay as obtained from HV. Based on the historical data, the PAD baseline was revised to 1794 tons/year in 1998 – and the target should have been revised to reflect realistic potential. The data indicates that current BOD data is 889 tons per year declining from a peak of 3078 tons in 2002 and a level of 3025 tons in 2004 prior to the completion of the Split-Solin wastewater treatment system. The commissioning and operation of the Kastela-Trogir wastewater treatment plant will further contribute to the elimination of BOD – with 85% of wastewater treatment, the indicator could reach 150 tons.

(c) Ecoli levels. (Reduction in average E coli levels at 15 monitoring sites in the Bays from

50 E coli/100 ml to 0 E coli/100 ml). The E coli baseline indicator selected at appraisal was revised for two reasons (i) it is stricter than EU requirements for bathing water; and (ii) is measured differently (coliforms) in Croatian standards by the Split Public Health Institute. The Croatian ordinance measures total coliforms, fecal coliforms, and fecal streptococci per 100 ml. The ordinance requires at least 80% of the samples to have the highest standards. Based on the discussions, the Croatian ordinance was adopted as the target (Annex 3, Table 8). PHI monitors this standard regularly and implements the sea water quality monitoring program in 14 different locations within Brac channel to assess the impact of the construction of the Split Solin wastewater system on coastal sea quality in the southern Split shores. Samples in 14 sites during 2002-2006 show significant improvements in the water quality after the sewage system became operational. The PHI has been providing bacteriological monitoring results of bathing water (coliforms) on 11 Kastela beaches during 1999-2006. In this period, compliance ranged from 89 to 99%, but without full compliance with the Croatian Ordinance on the Quality of Bathing Water on Beaches since the Kastela –Trogir system is still under construction.

Achievement of the objective (ii) to improve the safety, reliability, and delivery of drinking water in the project area is rated satisfactory.

The water supply improvements component was financed by the EBRD. The technical quality of service that the SWSC is providing to its customers has improved through the project and is satisfactory. The existing water supply network was improved and expanded and the new one was built, so that the safety and reliability of the water-supply system in the area have been upgraded. With sufficient availability of spring water, simple and low cost treatment was required (only chlorination), and limited need for pumping, the operations and maintenance costs of the system are minimized. All of SWSC’s customers are now receiving 24 hours of standard quality water supply, even in the dry summer season. Achievement of objective (iii) to improve the operational and financial performance of the water and wastewater utility, to make it more attractive for private sector participation in the future is rated moderately unsatisfactory.

At appraisal, three monitoring indicators were established to measure the performance of SWSC: (i) operating ratio; (ii) collection ratio; and (iii) unaccounted-for-water. The baseline indicators were revised to reflect historic data provided by SWSC. The target indicators were not revised, were not achieved, and remained below the desirable levels of an efficient company. The end-of-project financial indicators below were derived from the audited financial statements which provide the most consistent data available. The qualifications of the auditor should not impact the collection ratio or the operating ratio, since these ratios do not include the disputed financial revenues. See Annex 4 for details. SWSC

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continues to receive capital and operational subsidies from its owners which allow the company to operate with a positive cash flow. SWSC’s operating ratio. The baseline operating ratio was revised from 1.0 to 1.23. The target to be reached, 0.75 strong by industry standards, was not reached. The utility showed improvements during project implementation reaching 1.04 in 2007, but remained above the target or desired minimum level of less than 1.0. The bill collection ratio. The baseline ratio was 80% and the original target 95%. The baseline ratio was adjusted to 60% during implementation based on the company’s historic data. SWSC showed some improvements and the ratio reached 75% in 2006 and 85% in 2007, yet falling short of the 95% target, and below standards of well performing utilities. Unaccounted-for-water. This indicator deteriorated throughout implementation. The water supply component, financed by EBRD did not include measures to reduce UFW. SWSC prepared and submitted to the Bank an “Action Plan for Reduction of Water Losses” which aims to reduce the percentage of water losses from 54% in 2006 to 35% in 2013. UFW remained unsatisfactory at over 50% for the last 3 years.

3.3 Efficiency Net present value/economic rate of return, cost effectiveness (e.g. unit rate norms, least cost, and comparisons and financial rate of return)

The Project Appraisal Document (PAD) recognized that sewerage and wastewater treatment projects have significant external economic benefits which could not be easily quantified. The project’s financial net present value (FNPV) and rate of return (FRR) were taken as a proxy for the lower bound of the economic benefits. On this basis, the FNPV was estimated at DEM 35 million (HRK 143 million equivalent at the exchange rates then prevailing), and the FRR was expected to be at 15% based on a 10% discount rate. Assumptions included increases in tariffs and improvements in collection efficiencies and UFW. The project’s financial rate of return fell short of the expectations at appraisal. The re-estimated FRR is 7%, which is sufficient to cover the weighted average capital cost (WACC), estimated at about 3.5%. These figures remain ballpark estimates given lack of detailed financial data and the changes in project scope and associated benefits. The lower FRR is mainly due to the fact that tariffs were not increased to the extent envisaged at appraisal. From the perspective of cost efficiency, the project cost (without additional facilities) was 26% over the appraisal amount, with the main cost increase in the second component, which took the longest time to implement. The project, through its substantial externalities, has major economic benefits which are not adequately captured in the financial performance estimates. Such benefits to the economy are generally recognized, but are difficult to measure without extensive surveys and analysis. They include (i) protection and augmentation of revenues from tourism, a significant contributor to the local economy; (ii) public health and welfare benefits from improved water supply, and reduction of water-borne diseases and improvements in living standards from improved sewerage collection and disposal; and (iii) progressive increase in land and property values in localities benefiting from the sewerage services under the project. Sanitation projects in particular are not expected to earn high financial rates of return due to their high costs and large external benefits. Without the project investments, there is a significant risk of deterioration in environmental conditions and loss or stagnation of local incomes from tourism revenues which are sizeable in the project area.

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3.4 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs and efficiency) Rating: Moderately Satisfactory The project continues to be highly relevant to the Government’s long term strategy of improving the Adriatic waters, enabling the development of high end tourism on the Adriatic coast, and moving towards EU accession. While the Kastela-Trogir component has not been completed to assess its impact, its progress and government support give comfort to its future. The Split-Solin WWTP has started operations and showing the desired impact on surrounding environment. The project achieved its technical objectives given the high commitment and contributions of the government to expand the project. The project’s achievement of the institutional and operational objectives, however, hinders the full satisfactory performance of this project and places it at the moderately satisfactory level.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development

The poverty and gender impacts were not foreseen specifically at the time of preparation or appraisal. At the time, the project area was in economic turmoil following the war and was a recipient of a considerable number of refugees. Tourism had practically collapsed. The project contributed to the revival of the area by providing local employment at a critical time and giving a sense of return to normalcy through emphasizing return to improved water and wastewater services. Cleaner coastal water and improved seawater conditions in Split-Dalmatia county are evident to the naked eye, and contribute to the pleasant environment and to the touristic attraction of the area. (b) Institutional Change/Strengthening The impact/outcome of the project in this area is limited at best. Direct intended institutional strengthening is yet to happen depending on the outcome of the latest improvement plan of the SWSC. Focused attention was given by the national authorities to the water and wastewater issues in the project area, but with limited impact. Municipal involvement in policy direction was limited during implementation. Their lack of action to improve the institutional performance through tariff increases or other actions did not support the desired outcome of this component. However, municipalities continue to contribute capital and operational subsidies to support the operation of the utility reflecting the importance and support they attach to the sector. (c) Other Unintended Outcomes and Impacts (positive or negative)

4. Assessment of Risk to Development Outcome

Rating: Moderate The development outcome as defined by the project objectives are to: (i) reduce municipal waste; (ii) improve safety and reliability of drinking water supply; and (iii) improve the operational and financial performance of the SWSC. The project aimed to improve the safety and reliability of the water and sanitation system. SWSC staff was trained by contractors and others in the operations and maintenance of the facilities. Environmental monitoring was strengthened, and operation of the facilities is ongoing satisfactorily. While the SWSC is taking action regarding reduction of the UFW, the lack of progress on this and on the financial performance front over the long implementation period increases the risk to a

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desirable development outcome of improved operational and institutional performance. These risks continue to be mitigated, as in the past, by the traditional strong support of municipalities and the national government to the water and wastewater sector. This is further strengthened by Croatia’s aim to adhere to EU standards for environmental management and the importance it gives to tourism sector in the Adriatic region.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory The Bank established good relations, collaborating closely with all government counterparts and supported the framework for implementing the project to ensure adherence to the Bank’s fiduciary requirements. The Bank worked with the existing implementation arrangements as developed by the EBRD and the Government. EKO, the implementing agency, included the necessary staff for that purpose, but the long term institutional impact on SWSC, the final project owner was limited. Technically, the design is sound, but it did not anticipate the need for expansion. Baseline indicators and reporting framework proved to be unrealistic. The Quality Assurance Group (QAG) undertook a review of the project quality at entry in February 1999. Overall, the project scored a 2 or Satisfactory on seven of the nine criteria. The project scored a 3 or Marginally satisfactory on the social and stakeholder analysis and on readiness for implementation. QAG found that, while the project documents noted that social assessments and consultations were undertaken by the authorities, no further analysis on their scope, findings or recommendations were elaborated. The project also scored low on compliance with OD 4.30 on involuntary resettlement given the relative large requirement for land due to project investments. Financial analysis and agreements on M&E arrangements were also found to be marginal. (b) Quality of Supervision Rating: Satisfactory

The Bank showed sufficient flexibility and accepted to take on the more difficult wastewater component in Kastela-Trogir, which needed additional studies and preparation time. This flexibility maintained the integrity of the project at the expense of time and quality of preparation and implementation. The team’s focus on technical and fiduciary requirements was satisfactory. The team identified the safeguards issues and insisted they be solved appropriately. Focus on project outcome and indicators by the end of 2006 from the field office helped to get the attention of the counterparts. The team clearly involved the appropriate stakeholders who have the authority and responsibility to monitor the environmental impact of wastewater disposal and the quality of the Adriatic Sea. SWSC was encouraged to prepare action plans to remedy its financial situation, but the involvement of the SWSC owners is not clear in the documentation. The team’s effort is well documented in the supervision reports, but was not reflected in the Bank’s systems. The consistent and detailed reporting on the technical and fiduciary aspects of the project and the team’s corrective actions with regard to the indicators render the Bank’s supervision effort as satisfactory

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(c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory

The Bank’s overall performance is rated as Moderately Satisfactory. Project design did not take into account important aspects of water supply projects (reduction of UFW). Baseline indicators proved to be not fully adequate for the project and could have better considered the appropriate institutions. On the positive side, the Bank showed flexibility in accepting to finance components to ensure project completion, yet did not anticipate well the demands of the whole project. This is expected given the long period of implementation and the fundamental changes that occurred in Croatia due to the transition from post-war to economic revival. Institutional and financial deficiencies of SWSC were identified, and technical assistance provided, with increased Bank assistance to these issues in the latter years. The discussion and revision of the indicators contributed to the Bank’s supervision effort substantially, and to the borrower’s commitment to the long term outcome.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory The performance of the national government is satisfactory, given its adherence to its role of providing the necessary financial support of the project. Counterpart funding came on time and no delays were reported. The national government sets the policy directions in the sectors; implementation and management is the responsibility of local level governments. The role of the local governments was moderately satisfactory given a combined good performance of financial support to the capital investments, while postponing crucial decisions to improve the institutional and operational performance of the SWSC.

(b) HBOR Performance Rating: Satisfactory During the implementation of the Project, HBOR provided full assistance and support to the EKO Agency in resolving problems that were encountered. HBOR cooperated with project participants and was instrumental in resolving institutional and organizational problems. HBOR was the borrower and was responsible for the flow of funds to the municipality/SWSC. For that part, the financial management of the project as undertaken by HBOR was satisfactory and the audit findings unqualified. Reporting was satisfactory. (c) Implementing Agency or Agencies Performance

EKO Agency Rating: Satisfactory

The EKO Agency was responsible for project implementation particularly on procurement, financial management, and technical quality of the project. EKO was adequately staffed and its management succeeded in creating a unit with sufficient knowledge and dedication to the project. The Agency was provided sufficient resources by the government. At times procurement faced delays due to large workload and limited staffing. Changes in the design, land acquisition and other issues contributed to the workload, but EKO continued to work in accordance with Bank and Croatian requirements. Reporting

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and updating procurement plans was done satisfactorily. Financial management of the project accounts was satisfactory with positive audit findings. Reporting was timely and sufficiently detailed. SWSC Rating: Moderately Unsatisfactory SWSC was mainly responsible for achieving improvements in its financial and operational performance. EKO had the main responsibility for project implementation in terms of procurement, financial management, and supervision, in cooperation with SWSC. SWSC was active in the discussions on improving performance, yet it could only recommend tariff increases to the municipalities who have the final say in this matter. Nevertheless, some items – such as collection ratio or UFW- are within the responsibility of SWSC and remain to need much improvement. SWSC did not always undertake the recommendations for improvement outlined by the auditor and had considerable difference of opinion. SWSC and its municipal owners were satisfied with state auditor reports. (d) Justification of Rating for Overall Borrower Performance Rating: Moderately satisfactory

The multiplicity of actors on the borrower’s side and at times the lack of clarity of their responsibility renders a moderately satisfactory performance. Absent from the discussion during preparation and implementation is the role of the municipalities in determining tariffs and influencing costs of the SWSCs during or outside the project.

6. Lessons Learned y Environmental Screening and Land Acquisition. Readiness for implementation is one of the

key factors of project success. Large infrastructure projects should commence after land acquisition issues are cleared, the final designs and necessary permits (location permit, construction permit) are ready. Public consultation is also an important element to explain the project to the affected beneficiaries.

y Dedicated agency as a tool for implementation of complex project including multiple

stakeholders. Establishment of a dedicated agency makes it easier to build the needed capacity to ensure quality project management. To maximize project results, the implementing agency needs sufficient expertise and adequate autonomy to make decisions. The knowledge and capacity acquired would need to be integrated into the owner of the project to ensure longer term gains.

y Selection of Monitoring Indicators: The selection of monitoring indicators and baselines need to

be carefully done taking into account existing capacities and applicable standards, and involving institutions that are in place to monitor results. Showing a clear link between wastewater infrastructure investments and their environmental impact has positive demonstrative effects on building acceptance and ownership of the project in the region and the country.

Improving financial and operational performance is an important objective that needs Consistent effort from all sides to be achieved. Objectives need to be realistic, and dialogue with the owners of the utilities, the local governments, is an essential element to ensure the success.

Financial and Economic performances: The Bank should consider what levels of financial rates of return are suitable for urban wastewater projects, given the high costs of such projects, their large externalities, and affordability. High NPVs or FIRRs at affordable tariffs- may not be attainable in the medium term and within the life of the project particularly with a weak starting

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point of a utility. Gradual cost recovery and break-even cost benefit results with capital subsidies from the national and local governments are acceptable alternatives. An alignment of requirements on financial performance between the PAD indicators agreed during negotiations and those covenanted in the legal agreement would minimize confusion.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies The HBOR sent the Borrower’s completion report in time. The report was endorsed by the Ministry of Finance. The HBOR was pleased with the implementation of the project and its outcome. It plans to continue to monitor performance focusing on the financial and operational performance of SWSC and the ongoing action plan. See Annex 8. (b) Cofinanciers The EBRD prepared a completion report of its portion of the project. EBRD was generally satisfied with project implementation and outcome. See Annex 9. (c) Other partners and stakeholders No comments.

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Annex 1. Project Costs and Financing

Latest as Latest as

Original Estimate Revised (date) By end of Project % of % of

EBRD IBRD Local Total EBRD IBRD Local Total EBRD IBRD Local Total Revised Original

Waste Water Split-Solin - 24,365 5,494 29,859 9,259 13,277 5,494 28,030 9,794 17,489 7,239 34,522 123% 116%

Waste Water Kastela-Trogir 23,479 - 5,154 28,633 18,922 5,154 24,076 - 15,395 33,814 49,209 204% 172%

Water Supply Split-Solin-Kastela-Trogir 7,199 - 7,921 15,120 11,756 7,921 19,677 10,775 - 1,632 12,407 63% 82%

Water Supply RavneNjive I Kunceva Greda - 7,834 2,612 10,446 9,663 2,612 12,275 10,065 - 1,918 11,983 98% 115%

InstitutionalStrengthening - 1,035 1,675 2,710 1,035 1,675 2,710 44 350 771 1,165 43% 43%

Optimization

Total 30,678 33,234 22,856 86,768 30,678 33,234 22,856 86,768 30,678 33,234 45,374 109,286 126% 126%

Table 2: Project cost and Financing Plan by components (in euro 000)

(without Additional/Expanded Facilities Financed by the Government)

Original Estimate Amended December 2001 By end of Project End/ End/

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EBRD IBRD Local Total EBRD IBRD Local Total EBRD IBRD Local Total Revised Original

Waste Water Split-Solin 24,365 5,494 29,859 9,259 13,277 5,494 28,030 9,794 17,489 23,081 50,364 180% 169%

Waste Water Kastela-Trogir 23,479 5,154 28,633 18,922 5,154 24,076 15,395 48,371 63,766 265% 223%

Water Supply Split-Solin-Kastela-Trogir 7,199 7,921 15,120 11,756 7,921 19,677 10,775 - 15,843 26,618 135% 176%

Water Supply RavneNjive I Kunceva Greda 7,834 2,612 10,446 9,663 2,612 12,275 10,065 1,918 11,983 98% 115%

InstitutionalStrengthening 1,035 1,675 2,710 1,035 1,675 2,710 44 350 3,698 4,092 151% 151%

Optimization - - - NA

Total 30,678 33,234 22,856 86,768 30,678 33,234 22,856 86,768 30,678 33,234 92,911 156,823 181% 181%

69,389 -

Table 3: Project cost and Financing Plan by components (in euro 000)

(with Additional or Expanded FacilitiesFinanced by the Government)

Note: The government financed the construction of new facilities and networks to enable connecting as many of the new clients as possible and ensure theincreased quality of the constructed systems. The scope of the planned works changed in terms of length of mains, number and capacity of pumpingstations, and locations of tunnels and a more advanced Kastela-Trogir WWTP than originally designed. Additional facilities and subsystems wereincluded to connect new clients, and to ensure better functioning and efficiency of the newly constructed systems. To this end, the areas ofDugopolje (to the north of Split) and the south belt in Vranjic were included in the project, and the sewer network was expanded in the area of thecities of Kastela and Trogir. The investment program was adjusted to meet the changing and expanding needs of the area residents.

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Annex 2. Detailed Cost Data by Component

The project consists of two physical, infrastructure components A and B containing construction of two waste water collection and disposalsystems and one water supply system, as well as one institutional component C.

The infrastructure components each have two subcomponents as follows: Component A – Wastewater: A1 Split-Solin System; A2 Kastela-TrogirSystem. Component B – Water: B1 Water supply system Split-Solin-Kastela-Trogir; B2 Water supply systems Ravne Njive and Kunceva Greda

Original As of December 2007 Estimated for end of Project End/

EBRD IBRD Local Total EBRD IBRD Local Total EBRD IBRD Local Total Original

A1 Split-Solin Wastewater 24,365 5,494 29,859 9,794 17,489 18,300 45,583 9,794 17,489 23,081 50,364 1.687Design and Bidding Documents 1,601 1,601 1,647 24 1,671 1,647 22 1,669 1.042SewageVranjic 1,056 352 1,408 1,056 352 1,408 0.052

Network of Dujmovaca-Solin Catchment 4,198 1,218 5,416 4,198 1,219 5,417Tunnel Stupe 7,257 2,418 9,675 7,257 2,419 9,676Treatment Plant Stupe 5,955 1,971 7,926 5,955 1,973 7,928Submarineoutfall Stobrec 5,596 1,063 6,659 5,596 1,063 6,659

Hydrotechnical equipmentfor pumping stations

21,807 5,451 27,258

347 347 347 62 409Supervision and Quality Control 957 957 1,227 114 1,341 1,227 129 1,356 1.417Additional facilities 43 43 11,140 11,140 15,842 15,842 368.419

A2Kastela-Trogir WasteWater 23,479 5,154 28,633 15,395 17,585 32,980 15,395 48,371 63,766 2.227Design and BiddingDocuments 1,461 1,461 1,843 1,843 1,843 49 1,892 1.295Sub-system Kastela 2,858 1,048 3,906 2,858 9,889 12,747 0.579Sub-System Trogir 1,339 507 1,846 1,339 5,961 7,300Sub-system Ciovo 439 439 2,200 2,200Treatment plant 2,144 482 2,626 2,144 6,606 8,750Submarinecrossing andoutfall

22,018 22,018

1,941 1,535 3,476 1,941 3,711 5,652

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Original As of December 2007 Estimated for end of Project End/

EBRD IBRD Local Total EBRD IBRD Local Total EBRD IBRD Local Total Original

Tunnel Ciovo 5,056 3,302 8,358 5,056 4,544 9,600

Hydrotechnical equipmentfor pumping stations 214 214 214 854 1,068Additional Facilities 5,154 5,154 10,272 10,272 14,557 14,557 2.824

B1 Water Supply S-S-K-T 7,199 7,921 15,120 10,775 15,762 26,537 10,775 15,843 26,618 1.760Design and BiddingDocuments 863 863 1,218 1,218 1,218 1,218 1.411Sub-system KastelaSucurac 1,187 1,187 1,187 1,187 0.216Main pipeline throughKastela 5,639 837 6,476 5,639 836 6,475

Pumping station Solin andsub-system Sviti Kajo 1,454 671 2,125 1,454 696 2,150

Hydrotechnical equipmentfor pumping stations

5,4935,493

392 392 392 392Supervision and QualityControl

843843 885 100 985 885 100 985 1.168

Additional Facilities 7,921 7,921 14,154 14,154 14,211 14,211 1.794

B2 Water Supply RN I KG 7,834 2,612 10,446 10,065 1,727 11,792 10,065 1,918 11,983 1.147Group of facillities at KG 5,425 1,381 6,806 5,425 1,573 6,998 0.670Group of facillities at RBN

7,834 2,612 10,4464,640 346 4,986 4,640 345 4,985

CInstitutionalStrengthening 1,035 1,675 2,710 44 350 2,326 2,720 44 350 3,698 4,092 1.510Technical Assistance 751 751 109 354 463 109 700 809 1.077Equipent for O&M 284 43 327 241 43 284 241 43 284 0.869Supervision 44 44 44 28 72Additional Facilities 1,632 1,632 1,929 1,929 2,927 2,927 1.794

TOTAL PROJECTCOSTS 30,678 33,234 22,856 86,768 30,678 33,234 55,700 119,612 30,678 33,234 92,911 156,823 1.807

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Annex 3. Project Indicators

1. Key performance indicators

Original Objective/Indicator

Original Indicator Revised Indicator Observed

Objective: Reduce wastewater Pollutants Discharged into the Kastela and Trogir Bays a. Project Progress Completion of

contracts and disbursement of funds

Completion of contracts and disbursement of funds

Loan fully disbursed

b. Reduction of oil and grease pollution to no visible slick

No visible slicks No visible slick No visible slicks

c. Reductions in BOD discharge

From 30,000 to 1000 Kilograms

From 1794 tons in 1998. Target not changed.

2002: Peaked at 3078 tons. 2004: before Split/Solin WWTP operation: 3025 tons. 2005: 1143 tons after WWTP operation. 2006: 889 tons.

d. Reductions in average E coli levels at 15 monitoring sites

Reduction in average E-coli levels at 14 monitoring sites in Kastela and Trogir Bays from 50 E-coli/100 ml to 0 E-coli/100 ml

PHI Bactereological monitoring requirement: 80% of samples with not more than 500 for total, 100 for fecal, and 100 for streptococcus.

Compliance in 94%.

Objective: Improve the safety, reliability and delivery of drinking water in the project area 24 hour supply to 90% of the population

24 hour supply to 90% of the population

Safety and Reliability of Service



100% of SWSC customers now receive 24 hour water supply

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Objective: Improve the operational and financial performance of the SWSC a. Increase Revenue Collected to Revenue Invoiced

From 80-95% From 60% baseline in 1998. Target not changed.

75% in 2006 85% in 2007

b. Improve SWSC Operating Ratio

From 1.0 to 0.75 From 1.23 baseline in 1998. Target not changed.

1.00 in 2006 1.04 in 2007

c. Unaccounted for water Not to exceed 22% From 38.3% baseline in 1998. Target not changed.

53.6% in 2007

Table 5: Outcome Indicators 2. Output indicators Component Projected in PAD Actual/Latest estimate Components A and B Construction of the following

works:

2 treatment plants by 12/02 o WWTP Split-Solin 8/04 o WWTP Kastela-Trogir 12/08

2 submarine outfalls by 12/02

o submarine outfall Split-Solin 07/04

o submarine outfall Kastela-Trogir 07/08

28 sewage pumping stations by 12/03

o 8 sewage pumping stations Split-Solin 8/04

o 23 sewage pumping stations Kastela-Trogir 12/08

4,200 of rock tunnel by 12/03

o 2520 m tunnel for the system Split-Solin 09/03,

o 2800 m tunnel for the system Kastela-Trogir 12/07

20 km of gravity sewer by 12/05 9 km if pressure sewer by 12/03

o 55 km gravity and pressure sewers Kastela-Trogir 12/08

o 42 km gravity and pressure sewers Split-Solin 07/04

5 water pumping stations by 12/03

o 6 water pumping stations 02/04

3 distribution reservoirs by 12/03 o 4 distribution reservoirs 08/03

10 km of water mains by 12/04

o 30 km of water mains 8/03

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Component Projected in PAD Actual/Latest estimate Preparation and implementation of a performance enhancement plan for SWSC by 12/99

o Performance enhancement plan for SWSC 04/00, but not fully implemented. New plan approved in 12/07 and now being implemented.

Preparation and implementation of a corporate development plan for SWSC by 12/99

o Corporate development plan for SWSC 07/05 but not fully implemented. New plan approved 12/07 and now being implemented.

Component C

Institutional strengthening program completed for EKO by 12/99

o Implementation Completion Report by COWI 10/04

Table 6: Output indicators

Map 1: OIC water quality measuring points within Brac channel (1b-13b)

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Table 7: BOD load in Kastela Bay

Year BOD load (t/year)

Industrial BOD (t/year)

Total (t/year)

1998 1567 227 1794 1999 1719 80 1799 2000 1800 31 1831 2001 2249 156 2405 2002 2909 169 3078 2003 1727 174 1900 2004 2830 195 3025 2005 1004 139 1143 2006 814 75 889

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Table 8: Results of IOF’s monitoring program1 on 14 locations within Brac Channel (shaded area represents concentration of bacteria above maximum allowed level)

2002/2003 2005 2006 TC FC FS TC FC FS TC FC FS

1b 2b 3b 4b 4c 5b 6b 7b 8b 9b 10b 11b 12b 13b

Source: Institute of Oceanographic Institute of Croatia, Split Legend: TC= Total coliform, FC= Fecal coliform; FS= Fecal streptococcus

Maximum allowed concentration: TC 500, FC 100, FS 100 in 80% of samples (Ministry of Environmental Protection, Physical Planning and Construction)

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Annex 4. Economic and Financial Analysis For appraisal, the financial position of SWSC was examined, and the impact of the project on its future position forecasted. A financial net present value and financial rate of return analysis of the investment was undertaken. Separate economic analysis was not undertaken and the financial net present value was considered as a proxy for the lower bound of the net value of economic benefits, while recognizing the several external benefits that are difficult to quantify. The PAD recognized that economic benefits of the wastewater component, although considerable, are not amenable to quantification. They principally derived from the positive impact on the environment, tourism, citizens’ health, and potentially improved real estate values. These economic benefits are difficult to quantify or attribute parts of them to the project impact without considerable advanced work and data that is not currently available. The investments under the water supply component are largely concerned with the provision of reliable and uninterrupted water supply and replacement of worn-out and obsolete facilities that are creating major imbalances and inefficiencies in the system. The project investments were designed using cost effectiveness considerations, comparing several alternatives, and selecting the least cost option that is consistent with technical and environmental feasibility. The FNPV was estimated at UD 20 million (or HRK 143 million), and the financial rate of return (FRR) was estimated at about 15% using a 10% discount. The audited financial statements for the SWSC were assessed for the years 2004-2006. These provide the most consistent and reliable data. The qualifications do not affect the two financial indicators in the results framework – which remain below the desired levels. The material qualification relates to financial (not operational) income that is under dispute with HBOR/EKO; i.e. interest and exchange rate gains due to the loan. The balance sheet ratios are impacted but results from trends remain valid. SWSC revenues increased 12% between 2003-2006 and declined in 2007. Operating expenses continued to increase at 42% over the same period. It is noted, that with the proposed corrections due to the qualifications by the auditor, the SWSC becomes loss making. The main increase in expenses is in depreciation, which doubled between 2005 and 2006 and now constitutes 42% of its total expenditures, followed by staff costs at 29%. Depreciation is not a cash expenditure, however, and the large charge may be due to the new investments. SWSC has consistently kept sufficient current assets to cover its current liability above 1.15. SWSC does not have large debt, with total liabilities just above a third of its total assets. The explanation for this rather comfortable, financial position of SWSC is the consistent financial support by local as well as the national government. With regard to the project’s financial situation, significant changes have taken place in project scope and costs. A re-estimation has been carried out based on the total project cost at the time of completion. The incremental revenues from the project included the incremental tariff due to the project which were limited to the level required to (i) cover the additional depreciation from the project investments, and (ii) include the annual surcharge (HRK 2/m3) on account of the project. The re-estimated financial rate of return (FRR) for the project is 7%, which is lower than the 15% projected at appraisal. Nevertheless, the re-estimated FRR more than covers the actual weighted average cost of capital (WACC) estimated at 3.5%, based on loan and grant financing of 50% each in total project financing. The much lower than projected financial performance was the result of tariff increases that were lower than those envisaged at appraisal. The economic benefits of the project as appraised remain valid, and its impact on the community and the environment is evident.

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Split Water and Sanitation Company (SWSC) Income Statements

2003 2004 2005 2006 2007

Operating Revenues 174,505,186 159,947,469 165,877,195 195,553,973 184,471,000 Operating Expenses 137,655,523 147,296,103 169,531,852 194,881,261 191,880,000 Material Costs 48,253,723 19,979,984 18,201,210 18,398,000 Staff Costs 39,626,282 51,298,387 57,720,917 58,428,000 Depreciation (and amortization) 15,569,861 40,737,141 81,972,665 80,784,000 Other External Charges 28,309,143 21,663,262 23,238,000 Value Adjustment 21,437,608 23,068,989 12,359,034 5,812,000 Other Expenses 12,768,049 6,138,208 2,964,173 5,220,000 Financial Revenues 12,241,039 5,734,704 21,062,426 10,135,136 8,697,000 Financial Expenses 16,384,221 11,152,351 10,840,680 10,238,832 462,000 Total Revenues 186,746,225 165,682,173 186,939,621 205,689,109 193,168,000

Total Expenses 154,039,744 158,448,454 180,372,532 205,120,093 192,342,000 Profit (loss) before Taxes 32,706,481 7,233,719 6,567,089 569,016 826,000 Operating Ratio 0.79 0.92 1.02 1.00 1.04 Collection Ratio 58% 45% 62% 74% 85%

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Annex 5. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Walter Stottmann Sector Leader ECSIN

Richard MacEwen Program Team Leader ECSIN Sanitary Engineer Kishore Nadkami Task Team Leader ECSIN Financial Analyst Arumukham Saravanapavan ECSIN Sanitary Engineer

Lea Braslavsky Procurement specialist

Kavita Sethi Economist

Piotr Krzyzanowski Environmental Specialist

Gennady Pilch Lawyer Joseph Formoso Disbursement Officer Disbursement Aleathea Thomas Diallo Team Assistant ECSIN

Supervision/ICR

Salim Benouniche Senior Procurement Specialist ECSPS Procurement specialist

Xavier Chauvot De Beauchene GPOBAInfrastructure Specialist

Stjepan Gabric Task Team Leader ECSSD Infrastructure Specialist

Manuel Marino Task Team Leader ECSSD Infrastructure Specialist

Michael Gascoyne Sr Resource Management Officer CSRRMFinancial management

Hana Huzjak Operations Analyst ECSSD Finance Henry Laino Consultant LCSUW

Mirela Mart FM Specialist ECSPS Financial management

Norval Stanley Peabody Social Development Specialist/Consultant

ECSSD Social assessment

David N. Sislen Sector Leader LCSSD Financial analyst

Natasa Vetma Operations Officer ECSSD Environmental Specialist

Iwona Warzecha Sr Resource Management Officer ECSPS Financial management

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(b) Staff Time and Cost

Staff Time and Cost (Bank Budget Only) Stage of Project Cycle

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY96 151.45 FY97 91.61 FY98 130.51 FY99 0.00 FY00 -0.10 FY01 0.00 FY02 -0.04 FY03 0.00 FY04 0.00 FY05 0.00 FY06 0.00 FY07 0.00 FY08 0.00

Total: 373.43 Supervision/ICR

FY96 0.00 FY97 0.00 FY98 1.34 FY99 60.97 FY00 9 38.82 FY01 18 65.22 FY02 9 53.08 FY03 13 61.60 FY04 7 56.25 FY05 9 60.49 FY06 18 84.65 FY07 17 69.98 FY08 2 16.76

Total: 102 569.16

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Annex 6. Summary of Borrower’s ICR and/or Comments on Draft ICR Note: This report was prepared by the Borrower: Hrvatska banka za obnovu i razvitak – HBOR

(Croatian Bank for Reconstruction and Development)

Borrower’s Evaluation Report Summary 1. Assessment of the Project Objective, Design, Implementation and Operation experience 1.1. Relevance of Project Objectives The EKO Project is one of the largest investments in environmental protection launched in Republic of Croatia so far. The importance of the Project is paramount for the effort of moving the environmental protection standards in Croatia closer to fulfillment of the European Union (EU) standards. The development objectives of the Project were to:

- reduce municipal wastewater pollutant discharges into the environmentally sensitive Kastela and Trogir Bays consistent with Croatian and EU standards;

- improve the safety, reliability, and delivery of drinking water in the project area through construction of new and upgrading the existing water supply capacities and

- improve the operational and financial performance of the water and wastewater utility “Vodovod i kanalizacija” Split (SWSC).

Key indicators for measuring the project successfulness were: a) progress in commitments of construction contracts and disbursements of funds, b) continuous water supply in the project area, c) reduction in sea pollution level as measured by relevant institutions, d) financial indicators of Vodovod i kanalizacija Split. The EKO Project has included the broader area of the cities of Split, Solin, Kaštela and Trogir. The particular feature of the region is a large influx of inhabitants, intense construction for housing and industrial purposes, which was not proportionally followed by infrastructure development. Lack of adequate infrastructure caused the most intense concentration of pollution. The Croatian parliament proclaimed in 1994 that the areas of the Kaštela Bay and the Bay of Bakar represent the black spots of pollution on the Croatian Adriatic coast. The government of the Republic of Croatia has established that the financing of waste water management project in Split – Dalmatia County is the priority of the state because of the environmental protection and development of tourism. Further to the above mentioned objectives, HBOR evaluated them as highly relevant and realistically set, and they have also supported and complemented the government efforts. Through the relevant indicators, it can be seen that through the project implementation, further critical pollution of the environment was stopped and the quality of communal services for private consumers increased.

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1.2. Suitability of Project Design The Project has been divided into several components in order to facilitate the execution and monitoring,:

• Water-supply system Split – Solin – Kaštela – Trogir, • Sewerage system Split – Solin, • Sewerage system Kaštela – Trogir.

The project investor is the utility company Vodovod i kanalizacija d.o.o. Split, which is the final borrower of the EBRD and the IBRD loans. Within the scope of the project, in 1995, the co-operation of HBOR with IBRD and EBRD was started with the backing of the government of the Republic of Croatia. HBOR, being the borrower of the loan funds for the project implementation, was also appointed as the project coordinator of all activities during the project implementation.

Due to the complexity and more efficient managing of the entire project, and pursuant to the Decision of the Government of the Republic of Croatia dated June 28, 1996, the Agency EKO Kaštela Bay was established. The role of the Agency as the technically implementing body is the preparation and implementation of the financial and dynamic plans of the EKO Project realization, reporting, obtaining of all necessary permits for the Project implementation, the implementation of the procurement procedure, contracting and monitoring the implementation of all concluded contracts, as well as commissioning of the constructed facilities to the Investor. The Agency Management board consists of representatives of all institutions included in the Project. They contribute to the quality solution of all problems that emerged during the implementation.

It can be concluded that the project design both in organizational and technical sense with all further alterations and amendments during the project implementation, is adequate and sustainable. It is also adjusted to the needs and actual state on the site and as such contributed to the realization of planned goals of the project. 1.3. Assessment of the outcome of the Project against the agreed objectives All works on the construction of the water-supply system Split – Solin – Kaštela – Trogir were completed before the summer of 2004. The Project improved the quality and reliability of the water-supply system and enabled a constant supply of water. Therefore, the result of this part of the project is in line with the set goal. All capital facilities of the Split - Solin sewerage system were completed in 2004 and they have been in continuous operation ever since. In 2005, the commissioning of the facility was carried out and SWSC has taken care of its operation and maintenance. The construction of the additional network was completed in 2006, and the sewerage system in the area of Dugopolje and Klis remains to be completed. By the construction of the facilities, local inhabitants have obtained better communal services, which resulted in cleaner environment in the eastern part of the Kaštela Bay. Pursuant to the studies carried out by the Oceanographic Institute of Croatia, it was confirmed that the eastern part of the Kaštela Bay has recovered and that the constructed sewerage system is sufficient for the maintenance of the environmental protection in the area as well as for the attainment of Croatian and European Union environmental and quality standards.

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The construction of the Kaštela-Trogir sewerage system is behind the original schedule, primarily because the originally envisaged sub-system construction concept was given up due to the opposition of part of the population with respect to the location of the treatment plant and hydro-technical tunnel. After the Environmental Impact Study was prepared and after all necessary location and building permits were issued, the construction of the main facilities of this subsystem started in 2006 and 2007. The construction of this system is proceeding in accordance with Investment Program of 2006, and all works on the sewerage system Kaštela – Trogir are expected to be completed at the beginning of 2009. After the completion of this part of the sewerage system, the complete halting of pollutant discharges in the area of EKO Kaštela Bay is expected. However, the third objective of the Project (operational and financial strengthening of the investor) has not been achieved in accordance with the plan. During the implementation of the project, the operations of the SWSC were regularly audited by an independent auditor acceptable for the IBRD. The opinions of the auditors were either qualified or negative, and the objections related to the implementation of the International Accounting Standards and the International Financial Reporting Standards. Despite poor achievements of the SWSC in terms of the strengthening of its own operations, some improvements can be recognized. Towards the end of 2007, the SWSC prepared two strategic documents that were accepted by the SWSC Management: “SWSC Performance Improvement Plan” and “Action Plan for the Reduction of Water Loss” that cover improvements in the period to come. Further to the above, it can be concluded that in this part of the project, only a partial result was attained as compared to the initially set goal. 1.4. Assessment of the Project Implementation and Operation Experience The implementation of the Project has been assessed as satisfactory, but we would like to mention that it was necessary to make a number of changes to the investment program due to the adjustment to the actual situation on site. The Project value was planned in the total amount of EUR 133.301 million by the investment program in 1998. Due to extensive deviations in the volume and schedule of execution of works, as well as due to rising costs of individual parts of investment and expansion of the investment, the investment program was altered in 2001, 2004 and finally in 2006 in order to adjust it as much as possible to the actual financial and material status of the project. The table below shows the increase in investment program value by years.

inEUR million Investment programs by years

1998

2001

2004

2006

Investment project value

133.301

143.162

176.981

218.950

As it can be seen from the table above, in the period from 1998 to 2006, the investment program value significantly increased. The last investment program in 2006 raised the value of the Project to the estimated EUR 218.950 million.

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The increased value of the Project was for the most part the result of construction of new facilities and additional networks in order to enable connecting as many of the new clients as possible and ensure the increased quality of functioning and feasibility of the constructed systems. Other reasons for increasing the project value relate to the expansion of project to new settlements and municipalities and increased project costs due to rising costs of land in the region (when resolving ownership and legal matters), rising costs of building materials, salaries of employees, permanent or temporary relocation of the existing water-supply, electricity, telephone and other fittings due to overlaps with the routes of new collectors etc.

During the implementation of the Project, a number of problems and obstacles were encountered and slowed down the planned dynamics, among which the following should be focused upon:

- Problems during the process of adopting the concept for the construction of the Kaštela-Trogir sewerage system at the local level, relating to the issue of the construction site. The attitude of the local population with regard to treatment plant locations is usually negative. After individual project solutions are rejected, a long period of time is necessary to select and analyse the most favourable alternative solutions and adopt changes to the general spatial plan at the county level. Furthermore, an environmental impact study has to be prepared before. All of the above led to considerable delays in the implementation of the Project.

- Ownership and legal issues are reflected in the duration of the process of adopting spatial plans, problems relating to land registry and cadastre records, which generally results in a slowed-down procedure for obtaining construction permits. To conclude, for major construction activities within the framework of the EKO Project it was necessary to regulate land acquisition issues through complete and incomplete expropriation, all pursuant to the Expropriation Act (Official Gazette of Republic of Croatia No 9/94). Taking into account the outdated status of cadastre records and land registry, the expropriation proved to be an extensive and time consuming procedure.

- In accordance with the Construction Act (Official Gazette of Republic of Croatia No 52/99), which is no longer in force, the issuing of construction permits was possible only after all ownership and legal issues have been resolved. In the case of pipelines, which are constructed on several hundreds of plots, unresolved land registry records considerably delayed the start of the construction activities. This problem was observed in the case of other major projects of state importance, and therefore amendments to the Construction Act were (Official Gazette of Republic of Croatia No 117/01) adopted at the end of 2001, which, in the case of the construction of the facilities of state importance, provided for the possibility of obtaining construction permits and starting the construction works on those land plots for which legal and ownership issues have been resolved, while the process of solving legal and ownership issues for other land plots may continue simultaneously with the construction activities.

- The carrying out of works in the coastal area and in the populated regions is prohibited during the tourist season, i.e. from the middle of June to the middle of September, which also contributes to the prolonged period of construction.

- The issues relating to archaeological sites discovered during the implementation of the project also contribute to the delays and increased project costs because, in such situations, it is necessary to find an acceptable solution for the continuation of works without devastating valuable cultural heritage.

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During the Project implementation, all attempts were made to solve the above problems in the best possible way. It has to be pointed out that the projects like this one led to the amendments to the Construction Act, which will have a long-term favourable impact on all future infrastructure investments in the Republic of Croatia. In order to avoid considerable delays in major projects like this one, it is necessary to pay considerable attention to the planning of needed works before starting the implementation of the project itself. This includes detailed consideration of the legal framework for the implementation of the project and predicting of possible obstacles that may considerably affect the project. The optimal solution is to provide the loan funds at the moment when the project is in the advanced stage of readiness when most of the necessary permits have been obtained. In addition, we would like to point out that, in the case of large and complex projects, it is inevitable for certain unforeseen circumstances to occur, and the project must be viewed as a dynamic process changing over time and requiring continuous adjustments.

2. Evaluation of the Borrower’s own performance during the evaluation and

implementation of the Project (lessons learned) The performance of the Borrower has been highly satisfactory and outstanding, starting from the preparation phase, during which the Borrower showed a high degree of commitment and cooperation with the Bank. HBOR has made a considerable contribution to and has put in considerable efforts to the providing of the necessary funds for the Project. Also, as a co-ordinator, it has actively participated in the solving of all the problems encountered during the implementation of the Project. Being in continuous contact with the state and regional institutions, it contributed significantly to the successful resolving of such issues. HBOR co-operated successfully with all participants in the Project, receiving their maximum and prompt support. Therefore, we consider such an engagement to be far beyond the role of HBOR as a borrower under the Project, and this makes it one of the key participants in the Project. 3. Evaluation of the performance by the Bank, any co-financiers, or other partners

during the evolution and implementation of the Project (relationships) During the preparation and implementation of the Project, we received the full support, understanding and co-operation of the Bank and other co-financiers of this project: EBRD, Government of the Republic of Croatia and Hrvatske vode. All problems that were encountered during the implementation of the Project were resolved jointly, and the support of the Bank was always prompt and extremely kind. The Bank’s team was changed when the Project was already in the advanced stage of completion. However, this change did not affect the continuity of the Project implementation, but contributed to an even better understanding of the situation in which the Project was. Another factor that contributed to the success of the Project was also the fact that the operations of the Bank are decentralised, because the team in Zagreb has implemented the Project extremely successfully.

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The Bank’s team has established a very good co-operation with HBOR, the EKO agency and SWSC, and the missions were always a good chance for additional advice and professional support. During the procurement process, withdrawal and disbursement of the loan, all enquiries and demands were met by the Bank in time. HBOR has also achieved a very good co-operation with the EBRD that contributed significantly to the successful implementation of the Project through its advice and technical assistance. Beside the co-operation with the banks and other co-financiers of the project, we have also had a successful co-operation with the representatives of the EKO Agency and SWSC Split. We can say that the EKO Agency has successfully applied the acquired knowledge and has adjusted its operational procedures in order to include lessons gained through experience, which resulted in a faster and better solving of problems. During the last few years, the EKO Agency together with SWSC Split frequently held press conferences in order to enable correct providing of information to the public, maintaining of dialogues and the possibility of dissemination of information on the EKO Project, all for the purpose of preventing public criticism and suspicions.

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Annex 7. Comments of Cofinanciers and Other Partners/Stakeholders Note: The Project was cofinanced by the European Bank for Reconstruction and Development (EBRD). These comments were compiled from the EBRD’s final report received by the Bank. 1. Basic Information A loan for the extension and improvement of sewerage and water services in 5 municipalities (Split, Pula, Kastela, Solin and Trogir) was made to HBOR (Croatian Bank for Reconstruction and Development) and guaranteed by the Republic of Croatia. HBOR on lends to the Pula and Split Water Companies (Pula Herculanea and SWSC Split). The 5 municipalities guarantee the loan amounts to HBOR. IBRD also contributes EUR 32.5 mln to the investment programme and the Republic of Croatia co-finances a further EUR 39.5 million. The investment programme was expected to clean up and protect the quality of the sea in these municipalities which are tourist destinations on the Adriatic. The project would bring substantial environmental benefits, enhance living conditions for the local population and support the development of tourism. It would also contribute to the establishment of a viable system of municipal infrastructure financing in Croatia by strengthening the capacity of HBOR in appraising and managing municipal credit and establishing a model for the improvement of the operational and financial performance of water utilities. 2. Project Cost Control

Initial Amount (from Board report)

Latest Estimate of Outturn Cost

Item Split-Solin Wastewater Collection and Treatment 92,200,000.00 44,052,908.48Kastela-Trogir Sewerage System 92,000,000.00 47,038,853.07Split Solin Water Supply 49,400,000.00 22,680,907.85Kastela Trogir Water Supply Extension 28,400,000.00 14,520,689.43Rijeka Wastewater Extension 11,800,000.00Pula Wastewater Extension 40,300,000.00 15,083,545.09Monitoring Equipment 4,700,000.00 1,349,810.57Total Cost: 318,800,000.00 144,726,714.49Total Costs in EUR equivalent: 144.00 144,726,714.49

Initial Amounts above are in DEM, whereas Latest Estimates are in EUR, therefore figures are not comparable.

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3. Project Performance

3.1 Project Implementation Kastela Bay (Tranche A): The procurement phase for Split-Solin Sewerage system was completed in the first half of 2001 and construction started in September 2001 after the tourist season. The Split-Solin Sewerage system comprises a treatment plant and a submarine outfall and was jointly financed by the IBRD and local funds. Construction was delayed due to problems gaining access, but works are now completed. The Kastela-Trogir sewerage system was financed by IBRD. For the improvement of the water supply in Split, Solin, Kastela and Trogir, works for the Kastel-Sucurac subsystem were completed. The main pipeline, pumping station and associated subsystem, along with two sets of buildings were completed in 2003. 3.2 Project Management and Reporting HBOR is managing the reporting and administration of the loan. EBRD, HBOR (the client) and SWSC Split (the beneficiary) have co-operated closely on implementation and operational issues. Kastela Bay (Tranche A): The project management team, Eko-Kastela, was performing well and met all of the agreed targets. Monitoring of management performance was measured against the approved implementation plan and physical progress of the project. The Implementation Unit has all the necessary technical expertise. HBOR provided the EBRD with a satisfactory environmental report in the EBRD’s standardised reporting format provided by the Environmental Department. 3.3 Policy Undertaking and Institutional Reform Municipal credit consultants (Kommunalkredit), funded by the Bank’s TC funds, finalized assistance to HBOR with institutional development. The assistance focused on organizational and future business strategy for HBOR. 3.4 Financial Performance Financial performance of HBOR was good, as did the performance of SWSC Split. The financial performance of the beneficiaries (Pula Herculanea and ViK Split) continues to be in line with expectations, and no problems in this regard are envisaged. The major continuing problem remains accounts receivable, especially for ViK Split. Both companies are regularly discussing with their biggest debtors (state owned industries) the settlement of outstanding debt. 3.5 Overall Project Performance Rating: good

Justification: The Kastela Bay (Tranche A) component of the project was progressing well, although project execution and implementation was delayed compared to original plan and all construction under the project has not been completed. For the Kastela Bay components (Split-Solin Sewerage, Kastela-Trogir Sewerage and Split-Solin-Kastela-Trogir Water), all EBRD

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contracts have been awarded and construction was completed for both Split-Solin Sewerage system and the improvement of water supply in Split, Solin, Kastela and Trogir (Kastela-Trogir Sewerage is IBRD funded) 4. Achievement of Operation Objectives (as established at Project approval)

Objective Rating Measurement Targets Actual Performance Lay the groundwork for possible private sector involvement in municipal services

1 No specific targets set It is too early to comment on this. This option is possible and will be influenced by the implementation of the Corporate Development Programme for the Split Water and Sewerage Company, Herculanea Pula, and the macro economic conditions in Croatia.

Improve the quality of water supply in Split, Solin, Kastela and Trogir

2 This objective concerned rehabilitation and improvement of the Split-Solin and Kastela-Trogir Water Supply Systems. In Split and Solin the objective was to improve operational efficiency, reduce operating costs, and enhance service quality. In Kastela and Trogir this involved construction of a new water supply system, including treatment plant, distribution network and pumping stations, as water supplies were of poor quality and fall short of demand, particularly in the summer season, causing service interruptions and shortages.

Construction of the water supply system and related infrastructure was completed. Extension and reconstruction work on the supply network and the last of the subsections was delayed due to continued delays obtaining building permits and was completed in 2003.

Reduce pollution of Kastela Bay, Rijeka Bay and the sea off Pula

2 Reduction of untreated municipal waste water discharged into the sea. The project targeted on municipalities which are located in the main foreign tourist areas along the Adriatic coast, and a primary aim of the project was environmental restoration and reduction of pollution of the beaches and sea from discharge of municipal waste water. Waste water was discharged form a number of outlets without treatment, the sewer systems of Split, Solin, Kastela and Trogir

Kastela Bay (Tranche A) includes 3 components: - Split-Solin Sewerage System: Completion was delayed due to some protests about the location of the submarine outfall. Completion dates for each of the components (sewer networks, hydrotechnical tunnel, WWTP, submarine outfall) has been extended from 30/04/03 to 31/12/03, with the additional network (non EBRD-funded) and was completed in 2005.

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Objective Rating Measurement Targets Actual Performance were inadequate with less than half the population connected to the main system, and the environmental situation of Kastela Bay - affecting the tourism centers of Trogir and Ciovo Island - was particularly pressing. The investment programme includes the elimination of untreated waste water discharges in these areas, construction of connector and collector mains, extension of the sewerage networks, and construction of two new WWTPs.

- Kastela-Trogir Sewerage System financed by IBRD. Slight delays were incurred after the original delay of 2 years due to local disputes on the location of the WWTP. All works will be completed in the first half of 2009. - Split-Solin-Kastela-Trogir Water Supply Improvement - see above objective.

Set a model for financing of municipal infrastructure by developing HBOR as a municipal lending bank

1 No specific targets set. A technical co-operation, as a twinning arrangement with Kommunalkredit, was undertaken to strengthen the capability of HBOR to identify, prioritize and appraise investment projects on the basis of sound banking and economic principles. The assistance covered procedures and organization arrangements and staff training for management and monitoring of MEIP, and focused on the development of HBOR’s municipal lending capacity, covering the preparation of an overall strategy in the municipal sector; identification of priority areas and potential funding sources; strengthening of project appraisal and loan administration capacity; and establishment of municipal creditworthiness assessment and monitoring capacity. The twinning arrangement is now completed.

Enhance the operational and financial performance of the water utilities

1 To ensure the long-term financial viability of the provision and financing of water services in the municipalities included in MEIP, the Bank required that the utilities improve their financial and operational performance. Besides

40

Objective Rating Measurement Targets Actual Performance increased service quality, the programme’s main thrust is a gradual move towards cost recovery by improving cost efficiency, establishing accounting systems that recognize true operating costs, and adopting water tariffs and revenue collection practices that allow adequate income generation. FOPIP work with COWI consultants is now completed. The companies are also working on their own "Technical - Economic Optimization" studies.

Overall Fulfillment of Objectives:

Good Ratings Spread : Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Negative.

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5. Transition Impact

Type of Impact Short Term Longer Term Comments/Justification Verified Impact

Impact Potential

Risk to Transition

Step 1: Project Affected Change At Corporate Level Know How Good Good Low The TC twinning

arrangement with Kommunalkredit was undertaken to strengthen the capability of HBOR to identify, prioritize and appraise investment projects on the basis of sound banking and economic principles. The twinning arrangement resulted in a transfer of know-how to HBOR which is not only relevant to MEIP, but to other investments.

New Standards for Business Conduct at enterprise level

Good Good Low New standards of HBOR in project appraisal and loan administration capacity were included in the twinning arrangement with Kommunalkredit. In addition, a further TC with Cowi has assisted the sub-borrowers to enhance their financial and operational performance, aiming for cost recovery and cost efficiency, establishing new accounting systems that recognize true operating costs, and adopting water tariff and revenue collection practices that allow adequate income generation.

Step 2: Transition Impact At Industry Level and in the Economy as a whole Enhanced Competition N/A - each of the utility

sub-borrowers is holds a monopoly position within its region.

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Type of Impact Short Term Longer Term Comments/Justification Market Expansion via competitive interaction in the sector and industry

N/A - Market expansion is limited

Frameworks for Markets, institutions, laws and policies that promote market function and efficiency

Marginal Marginal Low N/A

Skills Transfer and dispersion to the industry and economy as a whole

N/A

Demonstration Effects; transfer of new behavior and patterns

N/A

Setting of new Domestic Standards for corporate governance and business conduct

N/A

Overall Rating: Good Ratings Spread : Excellent, Good, Satisfactory, Marginal, Unsatisfactory, Negative.

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Annex 8. List of Supporting Documents 1. Project Appraisal Document for a Municipal Environmental Infrastructure Project, May 27,

1998; 2. Aide Memoire, Back-to-Office Reports, Project Status Reports; 3. Project Progress Reports; 4. Project Evaluation Impact Assessment Studies; 5. Borrower’s ICR dated February 17, 2008; 6. EBRD Evaluation Report; 7. Financial Operational Performance Improvement of Municipal Utilities prepared by consultant

COWI in 2005; 8. Corporate Development Plan for SWCS prepared by consultant COWI in 2005; and 9. Performance Improvement Plan for SWSC prepared by SWSC in 2007.

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Annex 9. Maps (28669 and 28670)

DUJMOVACAˇ

STOBREC

SOLIN

SPLIT

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VRANJIC IP.S.

VRANJIC II P.S.VRANJIC III P.S.

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SALDUN P.S.

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UKRAINE

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ROMANIA

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10° 20° 30°

10° 20°

40°40°

50°

SLOVENIA

CROATIA

BOSNIA ANDHERZEGOVINA

SERBIA

MONTENEGROFYR

MACEDONIA

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Split

0 1 2 3 4 5

KILOMETERS

GRAVITY SEWER LINES

SUB-CATCHMENT BOUNDARIES

MAIN ROADS

SECONDARY ROADS

RAILROADS

CROATIA

MUNICIPAL ENVIRONMENTAL INFRASTRUCTURE PROJECTSPLIT-SOLIN-KASTELA-TROGIRWASTEWATER COMPONENT

WASTEWATER TREATMENT PLANTS

PUMPING STATIONS

GRAVITY SEWER LINES

RISING MAINS

TUNNEL

SUBMARINE OUTFALLS

STORM OVERFLOWS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

OCTOBER 2008

IBRD 28670R

CONSTRUCTED WASTEWATER NETWORK: EXISTING WASTEWATER NETWORK PRIOR TO THE PROJECT:

PUMPING STATIONS

GRAVITY SEWER LINES

RISING MAINS

TO BE CONSTRUCTED WASTEWATER NETWORK: